New surrender value norms: Life insurers likely to alter product mix

To push Non-par policy sales till Sep 30

The life insurance industry, which planned to increase its share of non-participating (non-par) products in the overall product mix, after its declining share in FY24, is likely to change its strategy to reduce the impact of the revised surrender value norms.

A change in surrender value norms is likely to dampen the growth of non-par products and boost product designing and innovation in the life insurance industry. 

Non-par product offers guaranteed benefits to a customer according to predetermined choices.

“The industry can reduce the impact of revised surrender value norms using multiple ways. As a result of the norms, the share of non-par products is likely to reduce or result in more production of combo products. The changes can also boost product innovation in the industry,” said an insurance official.

In FY24, the product mix of life insurance companies had shifted towards unit linked insurance plans (Ulips) due to buoyant equity markets. This shift affected the value of new business (VNB) margin of the life insurers due to lower product margin of the segment.

During the post earnings analyst call, all listed life insurance players, including Life Insurance Corporation of India (LIC), talked about focusing on non-par products and increasing their share in the overall product mix. This will help in improving the profitability margin.

The Insurance Regulatory and Development Authority of India (Irdai), in its master circular on life insurance products issued on June 12, prescribed enhanced special surrender value (SSV).

The circular will be effective from September 30, 2024.

According to the circular, life insurers will have to ensure that the SSV is at least equal to the expected present value of paid-up sum assured, paid-up future benefits and accrued or vested benefits, duly allowing for survival benefits already paid.

Also, the surrender value will be applicable after the first year if the first year annual premium has been paid.

“The growth of non-par products is likely to weaken, but it will not be merely because of the revised norms but also owing to the buoyant equity market,” said another insurance official.

However, analysts do not expect a move away from non-par to participating products (par) due to better profitability margin of the former. There is a likelihood of a change in product design.

“The insurers could shift their product mix. But, since non-par products have higher margins, insurers could shift product mix from within. They could either redesign their products or sell higher duration products since it is discounted with the 10-year G-sec. Even if it has a slightly lower return profile, the companies could maintain their profitability,” said Madhukar Ladha, director - equity research, Nuvama Institutional Equities.

According to the guidelines, benefits are discounted at 10-year G-sec with an additional cushion of 50 basis points (bps) in comparison to the proposal to discount it against 10-year G-sec rates.

Apart from the profitability margin, analysts expect that push from the distributors for non-par products before October 2024 is likely to result in an improvement in their sale.

“Post change in taxation in the previous Budget (Union Budget FY24), the share of non-par products has already come down from last year. From that base, if at all, for the next 2–3 months, there will be a strong push by the distributor for the existing (non-par) products.

So, there could be a higher growth in the non-par segment in the short term. Even after that, considering the flexibility given to customers, there is a possibility that growth may pick up for the segment since it is becoming more flexible for customers. So, I do not see a slowdown with respect to non-par,” said Avinash Singh, senior research analyst, Emkay Global Financial Services.

CHANGE OF STANCE

- Change in surrender value norms likely to dampen the growth of non-par products
 

- May boost product designing and innovation in the life insurance industry

- Share of non-par products likely to reduce in the industry

- Analysts do not expect a move away from non-par to participating products due to better profitability margin of the former

- Expect push from distributors for non-par products before October 2024 to result in an improvement in the sale of these products